Poor regulation undermines CNMI gaming industry

“As soon as we catch up on our cash flow, we will also catch up on payroll,” a spokesperson for the casino resort in the Commonwealth of the Northern Mariana Islands told reporters. One could be forgiven for assuming the above quote was made this week in reference to the beleaguered Imperial Pacific International (IPI), but, in fact, it comes from an Asia Gaming Brief report published in April 2013 in reference to the Tinian Dynasty Hotel & Casino. That same month, US government agents temporarily shut down Tinian Dynasty, arresting two executives, charging the casino with failure to file reports on large cash transactions with its customers. In June 2015, the US government fined the Tinian Dynasty and its owner, Hong Kong Entertainment (Overseas) Investments, US$75 million for “willful and egregious” violations of anti-money-laundering rules. Tinian Dynasty, which had opened in 1998, finally sputtered to a close in the following months, having its casino license pulled in May 2016. The facility had been the island’s largest employer. It left behind workers owed about two months in salaries and a decaying ghost town of a property. Much the same fate now faces IPI on neighboring Saipan. This is a project which, according to a September 2014 filing, was supposed to involve a US$7.1 billion investment. The fundamental problems now sinking IPI were not only predictable—they were predicted. A few months after the US$7.1 billion investment figure was announced, the South China Morning Post was filled with voices of doubt. One unnamed equity analyst told the newspaper, “I don’t think anyone believes that a seven billion investment would make sense in a place like Saipan. It’s unclear what type of revenue they would be able to generate and returns on investment.” Indeed, it was difficult to see what the competitive advantages of such a large casino resort would be. Saipan is about a five-hour flight from mainland China and the local entertainment options are modest. Moreover, with such a small local population, seasonal weather instability, and the need to import most goods, the viability of the investment was widely questioned. It wasn’t just foreign analysts either: Alexander Sablan, head of the Saipan Chamber of Commerce, announced in June 2015 that his organization had officially asked the government to ensure that the IPI investment wasn’t too large for the local economy to support. He was worried that the project would fail, especially without supplementary facilities like a meeting and convention center available on the island. Nevertheless, the soft opening of the temporary casino occurred on July 26, 2015. Then, something amazing began to occur: IPI’s management claimed—in Hong Kong—that visitors were packing into the temporary casino at an average of about 5,700-5,800 per day. In its first full month of operations, IPI said that they had brought in US$1.63 billion in revenues, based upon its 12 VIP gaming tables and 34 mass tables. It claimed US$6.1 billion in VIP table game rolling chip turnover for the first quarter of 2016. All of these VIPs must have come in direct since no junket operators had yet been authorized by the local government. IPI continued to pile up incredible revenue results at its temporary casino throughout 2016, and many experienced gaming analysts began to whisper that the results were not simply impressive—they were impossible. A Bloomberg article in November 2016 revealed that these suspicions were not limited to gaming industry analysts, that the US Treasury's Financial Crimes Enforcement Network (FinCEN) had begun to investigate IPI’s “suspicious financial flows.” As the Bloomberg article laid it out: “The daily reported revenue for each of its VIP tables in the first half of the year, about US$170,000, is almost eight times the average of Macau’s largest casinos… The revenue figures, or actual wins by the house, are just a fraction of total bets. In September, Imperial Pacific reported a record US$3.9 billion in bets at its casino—meaning the 100 or so high-rollers who it says come through its doors monthly each wagered an average of US$39 million.” Throughout the controversy, Commonwealth Casino Commission Executive Director Edward Deleon Guerrero vocally defended IPI and its financial reporting: “I can tell you the numbers are real. We are watching, documenting, and tracking it… It is an irrelevant issue if FinCEN is doing an investigation.” Local lawmakers soon began to question the regulatory structure itself, particularly the lack of a gaming tax. Representative Edwin K. Propst noted, “US$15 million a year is peanuts for what they are raking in when compared to what we would be receiving if we actually had a gross gaming revenue tax implemented from the beginning. We have the only casino industry in the world that charges zero on gross gaming revenue taxes.” Indeed, whether the real issue was money laundering or an effort to pump up company share values or massive accounting errors, the lack of a gaming tax presented a perverse incentive for IPI. Ben Lee, managing partner of IGamiX Management & Consulting, observed, “When you have no gaming revenue tax, it doesn’t matter what you roll.” The IPI headlines in recent weeks sound eerily like those of Tinian Dynasty from just a few short years ago: cash flow problems, unpaid workers, regulators closing in, the impending collapse of a major employer, and the possibility of yet another ghost town facility on the pristine beaches of CNMI. “What you have now is basically death in slow motion,” predicts Lee. But there is a common denominator at the base of all of the headlines—for Tinian Dynasty, for IPI, and even for the electronic gaming machine clubs and the ubiquitous neighborhood poker machines—which is the reality that CNMI’s gaming industry has been repeatedly undermined by poor regulation. For example, IPI has been given the power to self-audit. CNMI regulators did not provide themselves with the power to trace the money flows in Hong Kong, which is where almost all of the significant financial transactions take place. As the VIPs rack up their debts in CNMI, whatever collections are made happen in Hong Kong, away from the eyes of the Commonwealth Casino Commission, which apparently must accept IPI reports at face value.  Also, CNMI lawmakers frequently complain to the local media that they really have no idea about the state of IPI finances, not even about which payments have or haven’t been made to their own government and related institutions. Some observers say that this lax approach to regulation is also characteristic of the CNMI’s approach to smaller gaming industries such as the several electronic gaming machine clubs and the ubiquitous neighborhood poker machines. Enforcement of regulations tends to be weak, and initial regulatory standards have a way of becoming watered down over time. AGB contacted the CCC for comment, although had not received a response at the time of going to press. These examples suggest that until the CNMI improves its own governance, many of the same problems in its gaming industry will likely continue to reappear.